Fund accounting emphasizes accountability over profit tracking and is commonly used by non-profit organizations and government entities. Multiple general ledgers are used to track the flow of funds for each project or fund, making it easy to report activity to constituents and government agencies.
Fund accounting is a type of accounting strategy that focuses more on accountability than tracking profit generation. This particular approach to accounting is often used by entities that are not focused on profitability, such as non-profit organizations or government departments and commissions. One of the main features of this method is the use of multiple general ledgers that document the flow and use of funds coming into the entity, but without the emphasis on tracking earnings.
The general function of fund accounting has to do with showing where money is spent. This emphasis is one reason for the maintenance of multiple general ledgers, rather than self-balancing accounts reflected in a single general ledger, as is common with for-profit entities. Each of the ledgers tracks the receipt and disbursement of resources in connection with activities associated with a particular project or fund operated by the nonprofit entity. For accounting purposes, each individual ledger or fund must be reconciled within itself, complete with detailed reports supporting the current balance in the fund. All the reports associated with the different funds are used as supporting details for a cumulative report that is made available to the members of the organization as well as its directors.
With fund accounting, any donations or funds obtained from grants or donations are posted directly to the taxpayer’s designated general ledger or fund. There, any expenses related to that particular project are deducted from the balance. This arrangement makes it very easy for the nonprofit organization to report activity to its constituents, as well as to any government entity charged with overseeing the operation of the nonprofit organization.
The fund accounting approach can be very effective when reports need to be submitted to more than one government agency. For example, if a locally operated charity receives a grant to provide meals for inmates, a generous donation to support a homeless shelter, and an endowment to operate an after-school program, it is likely that each of these projects falls under the jurisdiction of a different government agency. By creating and maintaining a ledger for each project, it is possible to always provide each monitoring agency with an accounting of what has been done with the money received to support each program. With the use of fund accounting, the local charity remains compliant with the regulations that allow it to operate, and can demonstrate that funds received are being used in the manner specified.
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